Bought an Annuity and Not Sure What You Own? Here's How to Make Sense of It

"Someone sold me an annuity and I don't really know what it does" is one of the most common things we hear, and it's a completely reasonable position to be in. Annuity contracts are dense, the terminology varies by carrier, and the person who sold it may not have explained the tradeoffs clearly. Here's how to start making sense of what you actually own.

First, figure out which type you have

• Fixed annuity or MYGA (multi-year guaranteed annuity): Pays a guaranteed fixed interest rate for a set period, similar in concept to a CD.

• Fixed indexed annuity: Credits interest based on the performance of a market index, subject to a cap, participation rate, or spread, with principal generally protected from market losses.

• Variable annuity: Invests in mutual-fund-like subaccounts, so the value can go up or down with the market, often paired with optional guaranteed income or death benefit riders.

• Immediate or deferred income annuity: Converts a lump sum into a stream of guaranteed payments, either starting right away or at a future date you choose.

Then, find these details in your contract

• The surrender charge schedule and how many years remain on it, since cashing out early can mean giving back a significant percentage.

• Your free withdrawal amount, typically 10% of the value per year, which you can usually access without a surrender charge.

• How interest is credited: a guaranteed rate, or an index-linked formula with a cap, participation rate, or spread that determines your actual upside.

• Any riders attached, income riders, death benefit riders, and their ongoing annual cost, which is charged whether or not you ever use the benefit.

• Total annual costs, including mortality and expense charges and, for variable annuities, the underlying subaccount fund fees.

• Whether the annuity sits inside an IRA. If so, it's worth understanding that the IRA itself already provides tax deferral, so part of what you may have been sold as a tax benefit was, in that case, redundant.

• How withdrawals are taxed. For a nonqualified annuity (not held in an IRA), gains come out first and are taxed as ordinary income before you reach a return of your original principal.

Once you know what you actually have, the decision is usually one of three paths: keep it as-is because it's still serving a purpose, exchange it tax-free into a better contract through a 1035 exchange, or begin taking income or surrender it if the costs no longer justify the benefits. An hourly review can walk through your specific contract and lay out what each path would actually mean for you, with no incentive to sell you a replacement product.